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Posted in October, 2011 Market Commentary - The Volatile Summer
QUOTE FOR THE QUARTER: “Action is a great restorer and builder of confidence. Inaction is not only the result, but the cause, if fear.” – Norman Vincent Peale
THE QUARTER IN BRIEF: At the beginning of the last quarter, we noted in our commentary that there would likely be more than normal volatility in the markets as we worked through our nation’s budget and world debt issues. In that regard, we certainly weren’t disappointed. What was somewhat surprising was the extent of the market decline as the S&P 500 index fell -13.87% for the quarter, wiping out the index’s gain of the previous 12 months. The debt problems of several European nations and the fear of their contagion kept markets down as much as a host of lackluster economic indicators. Confidence waned on both Wall Street and Main Street and analysts began to second-guess the extent of economic recovery. On a brighter note, the real estate sector has begun to show some improvement and consumer spending has remained steady.
DOMESTIC ECONOMY AND MARKETS: The economy continues to crawl forward with occasional flashes of energy. Consumer spending and durable goods orders showed increases during the quarter although some of the spending is a reflection of jumps in food and energy prices. Overall, however, inflation remained at a modest annualized 3.8% in August. The unemployment rate remained at more than 9% for the quarter and our jobless recovery continues to be a drag on the economy. Not surprisingly, world issues and frustration over legislative gridlock in Washington have impacted consumer confidence. With the partisan and protracted debate over raising the nation’s debt ceiling limit and the ensuing U.S. credit downgrade by Standard and Poor’s, equity markets began their tailspin that lasted through much of the quarter. The Federal Reserve took note of the slower growth and brought back a plan that had been used back in 1961 called “Operation Twist.” Under this plan, the strategy will be to shift $400 billion into longer term Treasuries in an effort of foster economic growth.
GLOBAL ECONOMY AND MARKETS: Hopes that Greece could avoid default seemed to fade again during the quarter and there is more speculation that isn’t a matter of “if” but “when” the default will finally occur. A Greek default in and of itself would not be a catastrophic financial event but the fear is that a default would impact both European banks and the financial markets worldwide. Wall Street had hoped for decisive action by the European Union but, at quarter’s end, EU countries had still not voted on whether to strengthen its bailout fund and were considering other options to bring longer term stability to the region. In Asia, economies were contending with a drop in export demand and a slowdown in the manufacturing sector. Overseas markets reacted to the global economic news with descents more severe than in the U.S. as the MSCI and Emerging Market indices dropping -19.01% and -22.56% respectively for the quarter.
A LOOK AHEAD: What might happen to help the market climate improve this fall? There are four potential catalysts that might emerge. First, a decisive and unified effort by the EU to finally address the debt crisis in the region and provide stability to the banking system. Secondly, another strong corporate earnings’ season. Thirdly, agreement from the “Super Committee” in Congress charged with recommending solutions to our nation’s spending and tax issues. Lastly, economic data showing that the economy is still continuing to grow with no indication of a “double-dip” recession. Historically, the fourth quarter tends to be a good one for Wall Street. If some or all of the potential catalysts comes to pass, a strong fourth quarter may help the markets recover some of the carnage of last quarter and investors will be able to look back at year end with added gains to their portfolios.
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